7% Yield Susser Petroleum Partners

Susser Petroleum Partners Logo Although, I’m not a big fan of Jim Cramer’s Mad Money, I saw an interesting master limited partnership spin-off, Susser Petroleum Partners (SUSP) by its parent Susser Holdings (SUSS) on his show last week.

Susser Holdings (SUSS) had two segments, retail convenience stores and wholesale motor fuel distribution. The retail segment operates 552 “convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, food service, motor fuel and other services.” The distribution segment purchases “branded and unbranded motor fuel from refiners for distribution to our retail convenience stores, contracted independent operators of convenience stores, unbranded convenience stores and other end users.”

The distribution segment was spun off as Susser Petroleum Partners (SUSP) since it has more of a predictable cash flow:

  • More than 58% of the gallons of motor fuel is sold to the parent SUSS at a fixed 3 cent profit margin.
  • “During the twelve months ended June 30, 2012, approximately 90% of our motor fuel sales by volume would have been made pursuant to long-term fee-based distribution agreements.”
  • “We believe that we have limited exposure to fluctuating commodity prices because we generally pass the cost of the fuel that we distribute through to our customers. In 2011, over 95% of our motor fuel gallons were purchased only after receiving a customer order, and we held title to the fuel only for the period of time required for delivery, which is typically less than a day. We frequently use commodity derivative instruments to mitigate the price risk for the limited amounts of fuel for which we take title for a more extended period of time, typically not in excess of 60 days.”
  • It also has 53 properties that it leases. 
Even though it has a predictable cash flow, profitability is affected by:
  • The demand for motor fuel. The more it distributes, the more profitable it will be.
  • The price of motor fuel. Only the motor fuel it distributes to SUSS has a fixed profit margin of 3 cents.
Spin-off
 
As part of the spin-off:
  • 10,925,000 common units were sold at $20.50. “Net proceeds received by Susser Petroleum Partners from the sale of the common units totaled approximately $209.8 million, after deducting the underwriting discount and structuring fee, but before taking into account estimated offering expenses.” The proceeds will be distributed to SUSS.
  • SUSS holds 10,939,436 subordinated units and 14,436 common units. It holds a 50.1 percent interest in the partnership.
  • SUSS will own a 0.0% non-economic general partner interest. A general partner in a limited partnership has responsibility for conducting business and managing operations.
Cash Distributions
 
The common units and subordinated units differ on the priority of receiving dividends. The partnership will distribute all of its available cash each quarter in the following manner:
  • “first, to the holders of common units, until each common unit has received the minimum quarterly distribution of $0.4375 plus any arrearages from prior quarters;”
  • “second, to the holders of subordinated units, until each subordinated unit has received the minimum quarterly distribution of $0.4375; and”
  • “third, to all unitholders, pro rata, until each unit has received a distribution of $0.503125.”
After $0.503125 is reached, the available cash will be distributed in the following manner:
 
  • first, “85.0% to all unitholders, pro rata, and 15.0% to SUSS (in its capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $0.546875 per unit for that quarter;”
  • second, “75.0% to all unitholders, pro rata, and 25.0% to SUSS (in its capacity as the holder of our incentive distribution rights), until each unitholder receives a total of $0.65625 per unit for that quarter”
  • thereafter,  50.0% to all unitholders, pro rata, and 50.0% to SUSS (in its capacity as the holder of our incentive distribution rights).”
Conversion of subordinated units
 
“The subordination period will end on the first business day after we have earned and paid at least:
  1. $1.75 (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit for each of three consecutive, non-overlapping four-quarter periods ending on or after September 30, 2015 or
  2. $2.625 (150% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the related distributions on the incentive distribution rights for the four-quarter period immediately preceding that date, in each case provided there are no arrearages on our common units at that time

The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holder(s) of subordinated units or their affiliates are voted in favor of that removal.

When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and thereafter no common units will be entitled to arrearages.”
  
 Analysis
 
The dividend of $1.75 is at least guaranteed on the common units for many years to come because:
  • It has a predicable cash flow. 
  • The common units gets paid before the subordinated units. 
  • Based on the company’s 2013 projections, it expects to have enough available cash to pay over $2 dividends on the common and subordinated units.
  • The subordinated units will not get converted for many years.
  • SUSS will be able to grow faster as a result of this spin-off and this will help SUSP sell more fuel to them.
At the IPO price of $20.50 and a dividend of $1.75, this was a great deal with a yield of 8.5%. Even at the current price of $24.94, the yield of 7% is not bad because this is the worst case yield. If the company projections are correct, the dividend will increase to $2 in 2013.
 
Conclusion
 
I am going to wait until the price drops below $24 to get a yield in the 7.5% range before I buy. 

See the S1 Filing for SUSS here.

Wait for my next article where we examine the parent, SUSS after the spin-off.
 
Disclosure: I do not own SUSS or SUSP, but I may initiate a position in SUSS.
  

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